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SaaS as a Savior

Jeff Kaplan at THINKstrategies just posted an insightful article called "Why IT now sees SaaS as a savior" talking about the factors driving accelerating SaaS adoption. He cites the buzz he heard at SaaScon, the emergence of IT-specific SaaS solutions, the availabilty of SaaS platforms, SaaS as enabling for compliance, SaaS limits on customization leading to reduced failure risk and SaaS shifting software acquisition costs to subscription fees. Jeff even cites IT departments seeing SaaS as green since it reduces energy costs.

Jeff is very much on to something here, and I would agree with all of these, plus add a few more that I've seen at both Postini and Intacct.

First and foremost is that SaaS typically offers far better IT operations, infrastructure capabilities and service levels than any but the largest enterprises can afford to deliver on their own. This means that by choosing SaaS, IT shops can offer their business users vastly improved service. SaaS vendors go so far as to guarantee service levels, usually even offering refunds for service level agreement (SLA) misses. When I worked at IBM, our IT folks had documented SLA's, but I can't say as a line of business we ever got our money back when things went wrong.

SaaS vendors can do this because they are operating their solutions on behalf of thousands of clients, so they can amortize the costs of delivering very high-end service across many many companies. This typically spans 24x7 system and network monitoring and operations teams, continuous software and infrastructure maintenance and tuning, advanced security, reliability, backup and disaster recovery, SAS 70 type II certified processes, and gold plated, redundant data center infrastructure. This is all very expensive stuff, but it becomes affordable when you can spread these costs across thousands of companies.

The net of all this is that due to economies of scale, SaaS vendors can afford to and are skilled up to operate the technology better and cheaper than the IT department can do themselves - and once IT departments become comfortable with this idea it becomes liberating. My experience is that as IT execs get comfortable with the SaaS model, they begin to see this as freeing their department from the drudgery of non-value added work, and operations is a prime target since it is almost by definition non-strategic.

Jeff also sees IT leaders liking the idea of shifting costs from software licenses to subscription. I'd like to add TCO savings and budget flexibility to his ideas. With SaaS most people think first about software license costs as compared to SaaS subscription fees. But far more than just software licenses costs are involved - SaaS implies a shift of everything associated with acquiring, installing, operating and maintaining the software. So this is about TCO, including capital and operating costs for hardware, software and infrastructure - much more than software acquisition costs - and replaces them all with a single subscription fee.

Budget flexibility is also key. I've also heard many concerns from IT executives that maintenance and operations for their heritage on-premises systems continue to rise and are now consuming 80% or more of their budget. This leaves precious little room for innovation, and makes IT feel trapped, stuck spending money maintaining systems they know are no longer state of the art and unable to fund new projects. SaaS provides much more flexibility since it comes with almost no internal systems and infrastructure intertia, switching costs are far lower than with on-premises solutions, and you only pay for what you actually use.

The last idea I'd like to add is aggregation. There are also compelling benefits to IT that come from the ability of SaaS vendors to aggregate behavior and content across many customers. At Postini, we gained considerable intelligence about evildoers from aggregating message traffic from tens of thousands of companies, something that no individual IT department could have done on their own. At Intacct, we keep track of every click that every user makes in our applications - so we know exactly what parts of the applications are being used, and what parts are not being used, so we know where to spend our time to make our products better. Neither IT shops nor on-premises software vendors benefits from this type of real-time aggregated user feedback.

I've found that once IT starts to get their arms around the ideas of aggregation - that their company will benefit not just from what they do but also from all of the other businesses using that same SaaS offering, SaaS becomes even more compelling. This is utterly foreign in the on-premises software world and I belive it will be a huge accelerator as SaaS adoption takes off.

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